Budget 2016: Indradhanush retained for revival of PSBs

Allocation of Rs 25,000 crore for recapitalisation in FY17; govt promises more funds if needed

In allocating Rs 25,000 crore for recapitalising public sector banks in FY17, the government stuck to its Indradhanush scheme announced in August last year. However, finance minister Arun Jaitley assured that if additional funds are required, the government will find suitable resources.

The industry was expecting recapitalisation to the tune of Rs 30,000- Rs 35,000 crore in FY17 owing to the rise in provisioning requirements post asset quality review (AQR) by the Reserve Bank of India. Interestingly, of the Rs 25,000 crore capital infusion planned for FY16, banks have received Rs 19,955 crore. Public sector banks require Rs 1.8 lakh crore capital by FY19 and the government, under Indradhanush, had announced Rs 70,000-crore infusion in tranches till FY19.

“We stand solidly behind these banks,” Jaitley said, adding that the problem of stressed assets in public sector banks is a legacy from the past. “We are not interfering in lending and personnel matters of the banks,” he explained.

However, industry experts are sceptical of the success of Indradhanush and Jaitley’s stand of sticking to the pre-announced capital infusion. Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services, feels the bad loan situation has changed since August last year, when Indradhanush was announced. “Seen at a time when the NPAs and the subsequent provisions required by PSBs have shot up, `25,000 crore is a meager sum,” Parekh said.

Even Abizer Diwanji, national head of financial services, EY, said if the economy is expected to grow at 7% and assuming a bank credit growth of 12-15%, the sum of `25,000 crore looked paltry.

Outlining the need for PSBs to be strong and competitive, Jaitley said the Bank Board Bureau will be operationalised during 2016-17 and a road map for consolidation will be spelt out. The state-owned banks have been under severe stress arising out of delinquency in loans mostly belonging to infrastructure, power and steel sectors. As on September 2015, the stressed asset ratio — combination of bad loans and recast assets — of PSBs stood at 14.1%, compared to 4.6% in private sector banks.

However, some bankers see a silver lining in Jaitley’s assurance that the government will find resources for further capital infusion. Rakesh Sharma, MD & CEO, Canara Bank, said, “We are well capitalised. Moreover, at an industry level, the FM has said `25,000 crore is not a ceiling and it can be further increased if there is need for more capital.”

Jaitley added that the process of transformation of IDBI Bank has already started and the government will also consider reducing its stake to below 50%. As on December 2015, the government owns 80.16% of IDBI Bank.

Reacting to the announcements, the Bank Nifty fell 2.8% during the Budget speech. However, it recovered and closed at 13,946.60, up 1.12% from its previous close.

Faded rainbow

* Bank Board Bureau will be operationalised during 2016-17* Government considering reducing stake in IDBI Bank to below 50%* Recapitalisation was expected to be around `30,000-35,000 crore in FY17